Finra Probes Trading Tied to Credit Suisse Clients

Scott Patterson and Jenny Strasburg broke the news that the Financial Industry Regulatory Authority, Wall Street’s self-regulator, was scrutinizing ties between Credit Suisse Group AG and a number of trading firms over concerns the Swiss bank enabled potentially abusive or improper trading. Finra also is looking into whether the clients’ trading operations–many of which are overseas–violated U.S. rules covering anti-money-laundering oversight, according to sources.

The story as it appeared on Dow Jones:
May 21, 2014, 6:16 PM EDT – Finra Probes Trading Tied to Credit Suisse Clients

Market regulators are scrutinizing ties between Credit Suisse Group AG and a number of trading firms over concerns the Swiss bank enabled potentially abusive or improper trading, according to people familiar with the probe.

The Financial Industry Regulatory Authority, Wall Street’s self-regulator, in the past few weeks sent inquiries to Credit Suisse regarding hundreds of suspect trades by clients of the firm, these people said. Finra also is looking into whether the clients’ trading operations–many of which are overseas–violated U.S. rules covering anti-money-laundering oversight, they said.

Credit Suisse plans to cut its ties with several of the firms, according to people familiar with the probe and the firms. The bank is giving the firms about two to three months to find another trading partner before cutting off systems access.

The Finra probe isn’t targeting high-frequency traders, who have been in regulators’ cross hairs this year. Instead, it is focusing on firms that typically employ human traders–often in countries such as China and India–who use turbocharged computer systems to move swiftly into and out of stocks in the hopes of capturing gains from short-term swings, according to the people familiar with the probe.

Regulators have been scrutinizing trades by such firms for the past few years amid concerns they are manipulating markets or violating safeguards against money laundering.

Finra Chief Executive Richard Ketchum said at a conference this week in Washington that the regulator has about 170 investigations into market abuse by traders using algorithms, computer programs that relay orders into the market. The regulator is looking into manipulative trading tactics such as “spoofing,” in which a trader rapidly enters and cancels orders with the goal of luring other traders into the market, according to people familiar with the investigations.

Credit Suisse gave a number of firms targeted by Finra access to both its trading network and its “dark pool”–a private, lightly regulated trading venue–through a gateway known as “Magic,” according to people familiar with the bank’s operations. Magic uses high-speed computer systems to route client orders to nearly all corners of the market, including other dark pools.

Among the firms Finra is scrutinizing is World-Xecution Strategies, a New York broker that started trading on Credit Suisse’s Magic platform last year, according to people familiar with the probe and World-Xecution. The firm is part of World Trade Financial Group, which has offices in New York and Montreal and provides market access to thousands of traders in more than 60 countries, according to World Trade’s website. Credit Suisse has given World-Xecution about two months to find another broker, the people familiar with the probe say.

Finra’s investigation is the latest issue for Credit Suisse, which on Monday became the first financial institution in more than a decade to plead guilty to a crime, admitting that it conspired to aid tax evasion and agreeing to pay $2.6 billion to settle a probe by the U.S. Justice Department.

It comes amid a spate of investigations into computerized trading and dark pools, which don’t post investors’ buy and sell orders and only report results of completed trades. Regulators and law-enforcement officials have been ramping up scrutiny of computerized trading and opaque markets in recent months, including examining whether some trading venues operated by large broker-dealers are giving high-speed traders and other firms a leg up over other clients.

New York Attorney General Eric Schneiderman’s office recently sent requests for information to about a half-dozen brokers that operate dark pools, including Goldman Sachs Group Inc., Barclays PLC and Credit Suisse. The requests from Mr. Schneiderman are part of a broader investigation into whether high-speed firms and other clients have made private deals with venues that give them an edge over other investors, The Wall Street Journal has reported.

Finra’s probe sheds light on a new worry about the market’s evolving complexity: overseas traders gaining access to U.S. markets using top-tier brokerage services, giving them an opportunity to anonymously manipulate markets and potentially funnel illicit funds through the U.S. financial system.

Traders using systems such as Magic can access exchanges and other trading venues using the brokers’ market identification codes. The Securities and Exchange Commission in 2010 passed a rule requiring brokers to keep close tabs on trading by firms that use their direct-market-access services. The rule came amid concerns that clients with direct access to exchanges could accidentally unleash trading orders that go out of control and result in huge losses for the client and the broker.

Credit Suisse’s Advanced Execution Services computerized-trading platform, which provides the Magic market-access service, is widely considered one of the most sophisticated trading networks in the U.S. by traders, other clients and heads of competing venues. The platform accesses Credit Suisse’s dark pool, Crossfinder, which for years has been one of the largest dark pools in the U.S. by volume.

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